GoldenTree Asset Management LP, the $15.7 billion hedge fund specializing in corporate credit, hired Goldman Sachs Group Inc. trader Deeb Salem as the firm expands its mortgage-bond team.
Salem started at New York-based GoldenTree this week, Chief Investment Officer Steven Tananbaum said today in an interview.
Salem, who left the bank in May, was among the Goldman Sachs traders who handled its bets against subprime mortgages as the debt collapsed in 2007, at one point trying to manipulate prices of derivatives tied to the loans, according to a report last year by a U.S. Senate panel. Salem denied wrongdoing.
Asset managers including Canyon Partners LLC, Brevan Howard Asset Management LLP and D.E. Shaw & Co., known for betting in markets such as real estate, government notes or company debentures, have been wagering on mortgage securities as potential returns narrow elsewhere, accelerating gains in housing debt. The $1 trillion market for U.S. home-loan bonds without government backing offers "probably the most upside in structured products," though carries more risk than notes such as collateralized loan obligations tied to companies' health, Tananbaum said.
"The mortgage space for us is a good opportunity, and we're building up our team," he said today during an interview on Bloomberg Television's "Market Makers" with Erik Schatzker and Stephanie Ruhle.
Junk Yields
Salem, who was Goldman Sachs's head trader of non-agency mortgage securities without guarantees from government-backed Fannie Mae, Freddie Mac or Ginnie Mae, declined to comment, as did Michael DuVally, a spokesman at the New York-based bank.
Low benchmark interest rates have forced investors to look down the credit spectrum to seek assets with higher returns.
Speculative-grade company bonds yielded 7.5 percent Aug. 3 before accounting for potential defaults, down from 8.5 percent at the end of 2011, according to Bank of America Merrill Lynch index data. High-yield corporate loans offered 6.6 percent Aug. 3, down from a high this year of 7.2 percent Jan. 3, according to JPMorgan Chase & Co. data.
Subprime-mortgage bonds yield 7.5 percent after anticipated losses for debt with projected average lives of at least seven years, JPMorgan estimates. The yields are quoted on a loss- adjusted basis because homeowner defaults and refinancing mean the securities usually aren't outstanding until maturity. Yields will be greater if forecasts for foreclosures, recoveries or refinancings among the underlying loans prove too pessimistic.
Subprime Securities
Returns on senior subprime securities from 2005 through 2007, the years that produced the most defaults, have averaged more than 26 percent this year, Barclays Plc index data show.
Salem joined Goldman Sachs in 2001, according to records maintained by the Financial Industry Regulatory Authority, which don't show him involved in any regulatory actions, civil lawsuits, criminal matters or customer complaints.
During the mortgage meltdown in 2007, he was the bank's lead trader of single-name credit-default swaps referencing residential-mortgage-backed securities, according to the 2011 report by the Senate's Permanent Subcommittee on Investigations.
His group was "able to learn from our bad long position at the end of 2006 and layout the game plan to put on an enormous directional short," Salem said in a 2007 self-evaluation excerpted in the report. "The results of that are obvious."
'Short Squeeze'
Company documents also showed Goldman Sachs traders led by Michael J. Swenson sought to encourage a "short squeeze" by putting artificially low prices on swaps that would gain in value as mortgage securities fell, the panel said. The idea, abandoned after market conditions worsened, was to drive holders to sell and help the bank buy at reduced prices, according to its report.
"We began to encourage this squeeze, with plans of getting very short again," Salem said in the self-evaluation. "This strategy seemed do-able and brilliant, but once the negative fundamental news kept coming in at a tremendous rate, we stopped waiting for the shorts to capitulate, and instead just reinitiated shorts ourselves immediately."
In interviews with the committee, Salem and Swenson, his supervisor, denied attempting a short squeeze. Salem "claimed that he had wrongly worded his self-evaluation," according to the report. "He said that reading his self-evaluation as a description of an intended short squeeze put too much emphasis on 'words.'"
Client Interests
The committee cited the episode as an example of how Goldman Sachs traders placed its interests ahead of clients as the value of mortgage investments tumbled. The panel, led by Senator Carl M. Levin, a Michigan Democrat, and Tom Coburn, Republican of Oklahoma, called on regulators to craft strict bans on proprietary trading and conflicts of interest to keep the problems from recurring. The bank has denied wrongdoing.
During the Bloomberg Television interview, Tananbaum said that changes at Wall Street banks are making it easier to poach employees. "The firms' behavior has changed and because of that they're more open-minded," he said. Salem is an "honest," "high-integrity guy," he added in an interview after the appearance.
